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A Hassle-Free HECM or Long Term Success?
Last week the Washington Post published an article entitled “Window is rapidly closing to get hassle-free reverse mortgage”. It is a well-written article outlining the change the financial assessment brings but more importantly it outlines the HECM program’s history which lead to such a monumental overhaul of the program. “Interested in a reverse mortgage without a lot of hassles? Better get your application in fast. As of April 27, the federal government is imposing a series of extensive “financial assessment’ test that will make applying for a reverse mortgage tougher- much like applying for a standard home mortgage.”
Indeed the Home Equity Conversion Mortgage has moved from being based merely on age and equity to a fully-underwritten loan, all in the effort to reduce risks for both lenders and FHA. For a quarter century…
Download a transcript of this episode here.
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If there never was a single tax and insurance default, the losses incurred by the MMI Fund from HECMs could be larger. The reason is that the overwhelming if not all of the net losses reflected in the MMI Fund are those which have been actuarially projected, few are from terminations.
All HECMs accounted for in the MMI Fund were endorsed after 9/30/2008. Any losses on the HECMs due strictly to taxes and insurance in the MMI Fund are the liability of lenders or Fannie Mae, not HUD. All HECMs endorsed before 10/1/2008 are accounted for in the General Insurance Fund and are generally owned by Fannie Mae which is responsible for all of tax and insurance portion of any losses on termination not paid for by the borrower, sale proceeds or other means.
FHA insurance covers losses from the note and the note only. Any other losses are the responsibility of lenders or the current owner of the note; however, on Ginnie Mae issued securities, Ginnie is responsible for all losses not otherwise covered by FHA. Any losses incurred by Ginnie Mae are the responsibility of the lenders who securitized the HECM and in turn those lenders require that any sub lender bear their responsibility for such losses.
Beginning in 2007 when lenders began exploring securitization in earnest, they also began pursuing uniform financial assessment with HUD. Starting in early 2009, lenders were in full gear pushing HUD to form an industry financial assessment that would allow lenders to modify HECMs so that if the propensity to default was detected, there was a way to mitigate that probability.
HUD was so slow that by 2011, Wells Fargo decided that the risks were no longer worth the reward and abandoned its origination operations. Just months before Bank of America made what looks like a similar decision and despite their huge investment in purchasing Seattle Reverse Mortgage, Bank of America abandoned their origination operations.
Then MetLife Bank decided it would not go down without a fight. It thought some HECM lenders would be provoked to follow if MetLife acted on its own. Valiantly, MetLife stepped out on its own and mandated their form of financial assessment. Its principal weakness was the inability to modify the HECM to allow many borrowers who do not pass initial financial assessment to obtain a HECM through loan modification. We all know what happened next.
While the direct loss in business may be low from implementing Financial Assessment, a huge question will remain unresolved. How many prospects will be so discouraged by the idea of Financial Assessment that they simply never contact a lender or counseling.